The U.S. Supreme Court, in a unanimous ruling, adopted a narrow interpretation of the scope of whistleblower protection provided by Dodd-Frank, limiting the application of the law to those who report a possible violation of the securities laws directly to the Securities and Exchange Commission (“SEC”), based on the explicit language of the statute. In so ruling, the Court rejected the SEC’s position that the statute was ambiguous, and that whistleblowers are entitled to Dodd-Frank’s protections if they report concerns in a manner otherwise shielded by the statute, including internally. Rather, the Court found that the statutory definition was clear, and thus deference was not to be accorded to the SEC’s contrary view.
The Court’s opinion in Digital Realty v. Somers resolved a circuit split between the Ninth and Second Circuits, on the one hand, which had agreed with the SEC’s interpretation, and the Fifth Circuit, on the other. Compare Somers v. Digital Realty Tr. Inc., 850 F.3d 1045, 1046 (9th Cir.) (holding that the narrow definition of a whistleblower cannot be squared with the broad and unambiguous express anti-retaliation protections afforded under the statute to those who report internally) and Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015) (same) with Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 627-28 (5th Cir. 2013) (holding that Dodd-Frank only provides anti-retaliation protection to persons who report “to the Commission.”).
In 2002, Congress enacted the Sarbanes-Oxley Act of 2002, Pub. L. 107-204,116 Stat. 745 (“Sarbanes-Oxley”), which provided important anti-retaliation protections for whistleblowers who report misconduct to the SEC, any other federal agency, Congress or an internal supervisor. Eight years later, in the wake of the financial meltdown, Congress passed Dodd-Frank. Dodd-Frank, among other things, created financial incentives for defined whistleblowers, in the form of cash awards of between 10 and 30 percent of monetary sanctions collected by the SEC. §78u-6(b)(1)(A)-(B). In addition, Dodd-Frank prohibits an employer from retaliating against whistleblowers, as defined in the statute, who engage in certain conduct, including but not limited to reporting to the SEC. Dodd-Frank defines a whistleblower as “any individual who provides . . . information relating to a violation of the securities laws to the Commission.” §78u-6(b)(1).
Although both Sarbanes-Oxley and Dodd-Frank provide anti-retaliation protection to those who report misconduct, there are important distinctions between the statutes. Sarbanes-Oxley requires administrative exhaustion; Dodd-Frank does not. Compare 18 U.S.C. §1514A(b)(1)(A) with §78u-6(h)(1)(C)(i), (iii)(I)(aa). Sarbanes-Oxley requires the administrative filing within 180 days; Dodd-Frank allows a direct suit to be filed during a default limitation period of six years, and longer in some cases. Id. Sarbanes-Oxley limits recovery to actual back pay, while Dodd-Frank provides a successful plaintiff with double back pay plus interest. Compare, 18 U.S.C. §1515A(c)(2)(B) with §78u-6(h)(1)(C)(ii).
The plaintiff in Somers alleged that he was terminated shortly after he reported concerns about suspected securities violations to senior management. He did not report his concerns to the SEC or file an administrative complaint. Instead, he pursued his employer in federal court under Dodd-Frank. The District Court denied the employer’s motion to dismiss, finding the statutory scheme to be ambiguous and according deference to the SEC’s interpretation of Dodd-Frank under Chevron U.S.A Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). On interlocutory appeal, a divided panel of the Ninth Circuit affirmed, siding with the Second Circuit. The Supreme Court granted certiorari.
The Supreme Court held there was no need to consider whether Chevron deference was warranted, because the “the statute supplies an unequivocal answer” to the issue in its definition of a whistleblower. Slip op. at 9. Additionally, the Court concluded that the “purpose and design” of Dodd-Frank corroborates its interpretation. Id. at 11. Against the global objective of assisting the SEC with detection and prosecution of violations of the securities laws, the Court viewed the financial incentives and enhanced anti-retaliation protections as “work[ing] synchronously to motivate individuals with knowledge of illegal activity to ‘tell the SEC’”. Id., at 11, quoting S. Rep. No. 11-176 at 38 (emphasis in original). The majority conceded that, in effect, employees will remain ineligible for protection under Dodd-Frank until they tell the SEC, “but this result is consistent with Congress’ aim to encourage SEC disclosures.” Id. at 15–16 (citations omitted).
Making short shrift of the arguments of the SEC and the Solicitor General, in a majority opinion authored by Justice Ginsburg, the Court stressed that the statute left “no doubt,” the definition was “clear and conclusive,” and the result was “evident,” as well as consistent with the “core objective” of Dodd-Frank to “prompt reporting to the SEC.” Id. at 12, 16 and 18. Contrary to the Ninth Circuit, the Supreme Court unanimously agreed that there was no ambiguity in the law.
Left for another day is the view of the Supreme Court of the tenets of legislative interpretation. The concurring opinions provide evidence of the fissures that might exist in another case warranting consideration of legislative intent. Concurring in the result, Justices Thomas, Alito and Gorsuch criticized any consideration of Congressional reports, refusing to join in the portions of the opinion that “venture beyond the statutory text.” Thomas, J. Concurring Op. at 1. As they stated, what counts is “what Congress enacted rather than . . . what it intended” (citing Justice Scalia’s concurrence in Lawson v. FMR LLC, 571 U.S. 429, --- (2014)). Responding in a separate concurrence, Justices Sotomayor and Breyer said that it is not “wise for judges to close their eyes to reliable legislative history — and the realities of how Members of Congress create and enact laws — when it is available.” Sotomayor, J. Concurring Op. at 3.
Pundits view the decision as bad for businesses — further encouraging employees to bypass internal hotlines and reporting systems, and run straight to the SEC with any suspicions of wrongdoing. But the reality is, as the SEC noted in its most recent annual report to Congress, that nearly 83 percent of those who collected a financial bounty from the SEC also raised their concerns internally, either to a supervisor or compliance personnel, or through internal reporting mechanisms, before heading to the SEC. SEC Annual Report to Congress, November 2017, at p 17. In addition, several pro-business organizations filed amicus briefs advocating for the very result the Court reached, arguing for a limited expansion in Dodd-Frank of the anti-retaliation protections and remedies provided in Sarbanes-Oxley.
It remains to be seen whether this decision will, as the SEC has warned, undermine the important role of internal compliance programs. The opportunity to be informed of and able to conduct an internal investigation is far preferable to an unanticipated contact from the SEC. However, the allure of the SEC whistleblower bounty program is a powerful attraction to even the most loyal employee. To balance the call of the money and motivate employees to report concerns internally first, companies have to invest in a strong, visible and effective compliance culture. All employees need to be encouraged to report concerns, and supervisors must be trained to recognize compliance issues, treat concerns seriously and avoid any conduct that might be construed as retaliation. Employees who raise compliance issues want to be acknowledged and recognized for their initiative (assuming they do not request anonymity). Present actions to strengthen internal compliance can mitigate the risk of an uninvited visit from the government.
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Securities Litigation Alert | 03.13.17